U.S. Second Circuit - The FindLaw 2nd Circuit Court of Appeals Opinion Summaries Blog

Facebook IPO Litigation Dust Settles

When Facebook stumbled out of the gates at its initial public offering, early investors had to take a slow-but-steady approach to profitability.

A share was worth about $38 then; it trades for $189 today. That's a substantial return, but not what investors originally expected.

And that's why there is still ongoing litigation about that frenzied day in May 2012. But now it's between the insurance companies who split responsibility for an unprecedented settlement.

NASDAQ's Bad Day

Investors sued NASDAQ for technical difficulties that led to botched trades at the Facebook IPO. In a first-ever payout, the public stock exchange settled their claims for $26.5 million.

The parties settled almost three years ago, but the insurers are not done fighting about it. ACE American Insurance Company and Illinois National Insurance disclaimed coverage under directors and officers policies, relying on "professional services" exclusions.

Beazley Insurance Company, one insurer in the mix, paid $15 million then sued ACE and Illinois National for indemnification. On crossing motions for summary judgment, a federal judge ruled against Beazley.

In Beazley Insurance Co. v. ACE American Insurance Co., the U.S. Second Circuit Court of Appeals agreed with the trial judge.

"Customers" of NASDAQ

The appeals court affirmed based on three conclusions:

  • 1) retail investors in Facebook were unambiguously "customers" of NASDAQ;
  • 2) the underlying securities claims against NASDAQ arose out of NASDAQ's provision of professional services;
  • 3) the claims were excluded from coverage pursuant to the D&O policy's professional services exclusion.

Beazley had argued that investors were not "customers" of NASDAQ but rather its broker-members. The Second Circuit said investors were customers of both.

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